The Consequences of Insufficient Household Income

This new Consequences of Insufficient Household Income report provides a deeper level of understanding of the choices that ALICE and poverty-level families across the country make when they do not have enough income or assistance to afford basic necessities, and the consequences of those choices.

Lynette, a single

Lynette, a single working mother, can’t wait to file her taxes each year. The sooner she files, the sooner her refund arrives. Lynette, a full-time clerk at a local police department, counts on that money to keep her family afloat, covering basics her paycheck cannot. The refund – in the thousands – means her two young children can also access quality educational experiences that otherwise would be out of reach. While she’s working full time, her children can attend afterschool programs and summer camp, expanding their horizons and giving her peace of mind. “Without that refund, I can’t survive,” she says. Lynette’s refund is boosted significantly by receiving critical tax credits such as the Earned Income Tax Credit (EITC) and the Child Tax Credit. According to the IRS, one-in-five households in the United States eligible for the Earned Income Tax Credit does not claim it, leaving an estimated $1 billion unclaimed. Photo courtesy of United Way in Louisiana. For comparison, these amounts are significantly less than credits and deductions received by higherincome households. The mortgage tax deduction for households earning $100,000 to $200,000 was $9,315 in Oregon and $7,970 in Louisiana, and deductions are even larger for those with higher incomes (Internal Revenue Service, 2014; Internal Revenue Service, 2014b). EITC primarily helps those with the lowest incomes. Across the 15 states with United Way ALICE Reports, the median adjusted gross income of EITC filers ranged from $13,110 in Michigan to $15,126 in Idaho and Iowa. By comparison, the average Household Survival Budget for a family of four was $54,564 in Michigan, $47,676 in Idaho, and $46,020 in Iowa. These tax credits help families move above the FPL, but not to financial stability (Marr, Huang, Sherman, & Debot, 2015; Hungerford & Thiess, 2013; Brookings Institution, 2016; United Way ALICE Project, 2016). Consequences Missed tax savings: ALICE and poverty-level households often miss out on tax saving opportunities. Those who are eligible must also be aware of the credits, fill out the appropriate tax forms, and submit the required documentation. For many, this is a daunting task, and particularly so for people with low English fluency or without internet access. Many households are not eligible for tax credits; EITC and CTC are aimed at families with children, yet in today’s society, families with 78 UNITED WAY ALICE REPORT – THE CONSEQUENCES OF INSUFFICIENT HOUSEHOLD INCOME

children under the age of 18 make up only one-third of households in most states. For taxpayers eligible for the EITC with no qualifying children, the credit does little to offset income and payroll taxes. As a result, they often pay a higher rate of taxes than wealthier households (Internal Revenue Service, 2014; American Community Survey, 2014). High rates for tax preparation: Receiving tax credits depends on filling out tax forms correctly. Free tax preparation assistance is available in many locations, yet some workers either are not aware of this service or tend not to trust it. For example, according to a 2015 report to Congress, 60 percent of all Hispanic taxpayers use unregulated return preparers rather than an attorney, certified public accountant, or enrolled agent, compared to 18 percent of all U.S. taxpayers. Because unregulated preparers don’t need to meet minimum standards for competency and ethics, their clients run the risk of having their returns prepared incorrectly and paying exorbitant fees (Internal Revenue Service, Taxpayer Advocate Service, 2015a; Internal Revenue Service, 2015a; Internal Revenue Service, Taxpayer Advocate Service, 2015b). Strategy 2: Avoid Paying Taxes With the rise of the “gig” economy, there are more opportunities than ever before to earn income “off the books” and avoid paying income taxes. While this is not a new option, it has become much more common in the last decade with the advent of on-demand apps such as Uber, Etsy, and Airbnb. There are millions of service providers and sellers working and earning income in the on-demand platform economy, with an average monthly income ranging from $314 to $533. This income is not readily identifiable by government tax authorities (Bruckner, 2016; Morse, Karlinsky, & Bankman, 2009). Even on-the-books freelance and contract workers, whose numbers are also growing, sometimes try to delay or avoid paying taxes. While income and payroll taxes are automatically taken out of a salaried worker’s paycheck, contract and freelance workers are left to make tax payments themselves, typically as estimated quarterly taxes. These workers may delay or decide against paying quarterly taxes in order to keep more of UNITED WAY ALICE REPORT – THE CONSEQUENCES OF INSUFFICIENT HOUSEHOLD INCOME 79